Is $250,000 in savings enough to retire ?

The Employee Benefits Research Institute has issued the 2011 Retirement Confidence Survey. And the answer is: We are not confident. This seems to be, one could argue, an acknowledgment of the obvious.

One statistic that was surprising, however: 31 percent of people surveyed said they expected they could retire comfortably on under $250,000 in savings.

That sounded incredibly low, so I reached out to Mike Piper, the author of Can I Retire? and the Oblivious Investor blog, and asked him, how crazy is that?

Piper did some extremely quick back-of-the-envelope noodling and found that while such a retiree would probably be taking more than ideal out of their savings each year, they weren’t completely off the reservation.

Here’s how he parsed the question:

According to the U.S. Census Bureau, in 2008, 24.7 percent of households earned less than $25,000. And another 10.9 percent earned between $25,000 and $35,000. So $30,000 appears to be a decent ballpark estimate of the 30th percentile for household income in the U.S. (We’re going for 30th percentile here so that it lines up with the idea that 31 percent of people estimate needing less than $250,000.)

If we go to the Social Security Administration’s “Quick Calculator” and plug in 1/1/1946 as a birthdate (such that they’re 65 now, and about to retire) and $30,000 as current earnings, we get a ballpark estimate of Social Security benefits of $10,848 per year.

If we assume the person ends up paying 7.65 percent less total tax (due to not having to pay payroll tax), that’s $2,295 in tax savings.

That leaves approximately $16,857 per year left to be satisfied by pension income, work income and withdrawals from investments. If we assume no work or pension income, that’s a withdrawal rate of 6.74 percent based on a $250,000 portfolio. [Editor’s note: compared to the most common four percent  rule of thumb.] Definitely a bit too high for comfort from a regular portfolio. But if the person annuitizes via a single premium immediate lifetime annuity, it’s not terribly outside the range of possibility.

Other factors that could work in the investor’s favor:

  • We didn’t back out the no-longer-needed savings for retirement from the $30,000 figure.
  • If the person is married, there could be spousal Social Security benefits as well. (Though exactly how this works out depends on the breakdown of the $30,000 income between the two of them.)
  • The tax savings could be greater than we estimated, as income tax would likely be lower as well.
  • There could be some pension or work income.

Of course, there are a whole list of factors that could work in the opposite direction. For example:

  • Many investors probably wouldn’t recognize that they’d need to annuitize in that situation.
  • Most investors pay far too much in investment fees, making even a four percent withdrawal rate too high for safety.

That’s certainly more upbeat than I’d thought on first blush. On the topic of retirement it’s amazing what passes for the good news these days.

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